All Related Questions of Put Option

Q: Warren Co. purchased a put option on Echo common shares on

Warren Co. purchased a put option on Echo common shares on January 7, 2014, for $360. The put option is for 400 shares, and the strike price is $85 (which equals the price of an Echo share on the purc...

Q: Johnstone Co. purchased a put option on Ewing common shares on

Johnstone Co. purchased a put option on Ewing common shares on July 7, 2014, for $240. The put option is for 200 shares, and the strike price is $70. (The market price of a share of Ewing stock on tha...

Q: On November 3, 2014, Sprinkle Co. invested $200

On November 3, 2014, Sprinkle Co. invested $200,000 in 4,000 shares of the common stock of Pratt Co. Sprinkle classified this investment as available-for-sale. Sprinkle Co. is considering making a mor...

Q: Suppose a financial manager buys call options on 50,000 barrels

Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $95 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise p...

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics? Stock price = $57 Exercise price = $60 Risk-free rate = 6% per year, compounded continuously Maturity...

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics? Stock price = $93 Exercise price = $90 Risk-free rate = 4% per year, compounded continuously Maturity...

Q: What are the deltas of a call option and a put option

What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you? Stock price = $67 Exercise price = $70 Risk-free rate = 5%...

Q: Explain why a put option on a bond is conceptually the same

Explain why a put option on a bond is conceptually the same as a call option on interest rates.

Q: There is a European put option on a stock that expires in

There is a European put option on a stock that expires in two months. The stock price is $73, and the standard deviation of the stock returns is 70 percent. The option has a strike price of $80, and t...

Q: Suppose there were call options and forward contracts available on coal,

Suppose there were call options and forward contracts available on coal, but no put options. Show how a financial engineer could synthesize a put option using the available contracts. What does your a...

Q: Brozik Corp. has a zero coupon bond that matures in five

Brozik Corp. has a zero coupon bond that matures in five years with a face value of $60,000. The current value of the company’s assets is $57,000, and the standard deviation of its return on assets is...

Q: The put–call parity condition is altered when dividends are paid

The put–call parity condition is altered when dividends are paid. The dividend-adjusted put–call parity formula is: S × e−dt − P = E × e−Rt + C where d is again the continuously compounded dividend yi...

Q: In the chapter we noted that the delta for a put option

In the chapter we noted that the delta for a put option is N( d 1 ) − 1. Is this the same thing as −N(− d 1 )?

Q: T-bills currently yield 4.8 percent. Stock in

T-bills currently yield 4.8 percent. Stock in Nina Manufacturing is currently selling for $63 per share. There is no possibility that the stock will be worth less than $61 per share in one year. a. Wh...

Q: Rob wishes to buy a European put option on BioLabs, Inc

Rob wishes to buy a European put option on BioLabs, Inc., a non-dividend–paying common stock, with a strike price of $40 and six months until expiration. BioLabs’ common stock is currently selling for...

Q: Maverick Manufacturing, Inc., must purchase gold in three months for

Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $1,530 per ounce, the firm...

Q: An investor is said to take a position in a “collar

An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options sh...

Q: McLemore Industries has a zero coupon bond issue that matures in two

McLemore Industries has a zero coupon bond issue that matures in two years with a face value of $50,000. The current value of the company’s assets is $29,000, and the standard deviation of the return...

Q: Audrey is considering an investment in Morgan Communications, whose stock currently

Audrey is considering an investment in Morgan Communications, whose stock currently sells for $60. A put option on Morgan’s stock, with an exercise price of $55, has a market value of $3.06. Meanwhile...

Q: You are a broker for frozen seafood products for Choyce Products.

You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in one year you will deliver 4000 kilograms of fro...

Q: Dynamic Energy Systems stock is currently trading for $33 per share

Dynamic Energy Systems stock is currently trading for $33 per share. The stock pays no dividends. A one-year European put option on Dynamic with a strike price of $35 is currently trading for $2.10. I...

Q: You own a put option on Ford stock with a strike price

You own a put option on Ford stock with a strike price of $10. The option will expire in exactly six months’ time. a. If the stock is trading at $8 in six months, what will be the payoff of the put? b...

Q: Assume that you have shorted the put option in Problem 4.

Assume that you have shorted the put option in Problem 4. a. If the stock is trading at $8 in three months, what will you owe? b. If the stock is trading at $23 in three months, what will you owe? c....

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $85 and three months to expiration sell for $2.40 and $5.09, respectively. If the risk-free rate is 4.8 percent per year, compounded continuous...

Q: Suppose a certain stock currently sells for $30 per share.

Suppose a certain stock currently sells for $30 per share. If a put option and a call option are available with $30 exercise prices, which do you think will sell for more? Explain.

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $55 expire in two months and sell for $2.65 and $5.32, respectively. If the stock is currently priced at $57.30, what is the annual continuousl...

Q: Suppose the interest rate on T-bills suddenly and unexpectedly rises

Suppose the interest rate on T-bills suddenly and unexpectedly rises. All other things being the same, what is the impact on call option values? On put option values?

Q: A stock is currently selling for $38 per share. A

A stock is currently selling for $38 per share. A call option with an exercise price of $40 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, comp...

Q: A put option that expires in six months with an exercise price

A put option that expires in six months with an exercise price of $65 sells for $4.89. The stock is currently priced at $61, and the risk-free rate is 3.6 percent per year, compounded continuously. Wh...

Q: Johnstone Co. purchased a put option on Ewing common shares on

Johnstone Co. purchased a put option on Ewing common shares on July 7, 2012, for $240. The put option is for 200 shares, and the strike price is $70. (The market price of a share of Ewing stock on tha...

Q: Warren Co. purchased a put option on Echo common shares on

Warren Co. purchased a put option on Echo common shares on January 7, 2012, for $360. The put option is for 400 shares, and the strike price is $85 (which equals the price of an Echo share on the purc...

Q: On November 3, 2012, Sprinkle Co. invested $200

On November 3, 2012, Sprinkle Co. invested $200,000 in 4,000 shares of the common stock of Pratt Co. Sprinkle classified this investment as available-for-sale. Sprinkle Co. is considering making a mor...

Q: The scene is a conference room on the 10th floor of an

The scene is a conference room on the 10th floor of an office building on Wall Street, occupied by Anthes Enterprises, a small, rapidly growing manufacturer of electronic trading systems for equities,...

Q: Compute estimated profit in 1 year if Telco sells a put option

Compute estimated profit in 1 year if Telco sells a put option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case.

Q: For Figure 2.8, verify the following:

For Figure 2.8, verify the following: a. The S&R index price at which the put option diagram intersects the x-axis is $924.32. b. The S&R index price at which the put option and forward cont...

Q: Let S = $100, K = $95, r

Let S = $100, K = $95, r = 8% (continuously compounded), σ = 30%, δ = 0, T = 1 year, and n = 3. a. Verify that the binomial option price for an American call option is $18.283. Verify that there is ne...

Q: Consider a one-period binomial model with h = 1,

Consider a one-period binomial model with h = 1, where S = $100, r = 0.08, σ = 30%, and δ = 0. Compute American put option prices for K = $100, $110, $120, and $130. a. At which strike(s) does early e...

Q: Repeat the previous problem assuming that the stock pays a continuous dividend

Repeat the previous problem assuming that the stock pays a continuous dividend of 8% per year (continuously compounded). Calculate the prices of the American and European puts and calls. Which options...

Q: In the following, suppose that neither stock pays a dividend.

In the following, suppose that neither stock pays a dividend. a. Suppose you have a call option that permits you to receive one share of Apple by giving up one share of AOL. In what circumstance might...

Q: Suppose that to buy either a call or a put option you

Suppose that to buy either a call or a put option you pay the quoted ask price, denoted Ca(K, T ) and Pa(K, T ), and to sell an option you receive the bid, Cb(K, T ) and Pb(K, T ). Similarly, the ask...

Q: Refer to Figure 19.2. a. Verify that

Refer to Figure 19.2. a. Verify that the price of a European put option is $0.0564. b. Verify that the price of an American put option is $0.1144. Be sure to allow for the possibility of exercise at t...

Q: Using the delta-approximation method and assuming a $10m investment

Using the delta-approximation method and assuming a $10m investment in stock A, compute the 95% and 99% 1-, 10-, and 20-day VaRs for a position consisting of stock A plus one 105-strike put option for...

Q: Explain how to synthetically create the equity-linked CD in Section

Explain how to synthetically create the equity-linked CD in Section 15.3 by using a forward contract on the S&P index and a put option instead of a call option. (Hint: Use put-call parity. Remembe...

Q: What was the net impact on Jensen Company’s 2017 income as a

What was the net impact on Jensen Company’s 2017 income as a result of this fair value hedge of a firm commitment? a. $–0–. b. $680.30 decrease in income. c. $300 increase in income. d. $980.30 increa...

Q: What was the net impact on Jensen Company’s 2018 income as a

What was the net impact on Jensen Company’s 2018 income as a result of this fair value hedge of a firm commitment? a. $–0–. b. $1,319.70 decrease in income. c. $77,980.30 increase in income. d. $78,68...

Q: What was the net increase or decrease in cash flow from having

What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? a. $–0–. b. $1,000 increase in cash flow. c. $1,50...

Q: On June 1, Alexander Corporation sold goods to a foreign customer

On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,000,000 pesos and will receive payment in three months on September 1. On June 1, Alexander acquired an option to sell...

Q: On June 1, Vandervelde Corporation (a U.S.-

On June 1, Vandervelde Corporation (a U.S.-based manufacturing firm) received an order to sell goods to a foreign customer at a price of 100,000 leks. Vandervelde will ship the goods and receive payme...

Q: The Pier Ten Company, a U.S. company,

The Pier Ten Company, a U.S. company, made credit sales to four customers in Asia on September 15, 2015, and received payment on October 15, 2015. Information related to these sales is as follows: T...

Q: Consider a perpetual put option with S = $50, K

Consider a perpetual put option with S = $50, K = $60, r = 0.06, σ = 0.40, and δ = 0.03. a. What is the price of the option and at what stock price should it be exercised? b. Suppose δ = 0.04 with all...

Q: Suppose that S = $100, σ = 30%, r

Suppose that S = $100, σ = 30%, r = 6%, t = 1, and δ = 0. XYZ writes a European put option on one share with strike price K = $90. a. Construct a two-period binomial tree for the stock and price the p...

Q: Here is a quote from an investment website about an investment strategy

Here is a quote from an investment website about an investment strategy using options: One strategy investors are applying to the XYZ options is using “synthetic stock.”Asynthetic stock is created whe...

Q: For a stock index, S = $100, σ =

For a stock index, S = $100, σ = 30%, r = 5%, δ = 3%, and T = 3. Let n = 3. a. What is the price of a European call option with a strike of $95? b. What is the price of a European put option with a st...

Q: Repeat the previous problem calculating prices for American options instead of European

Repeat the previous problem calculating prices for American options instead of European. What happens? Previous Problem For a stock index, S = $100, σ = 30%, r = 5%, δ = 3%, and T = 3. Let n = 3. a. W...

Q: You wish to insure a portfolio for 1 year. Suppose that

You wish to insure a portfolio for 1 year. Suppose that S = $100, σ = 30%, r = 8%, and δ = 0. You are considering two strategies. The simple insurance strategy entails buying one put option with a 1-y...

Q: Repeat Problem 11.4, only set r = 0 and

Repeat Problem 11.4, only set r = 0 and δ = 0.08. What is the lowest strike price (if there is one) at which early exercise will occur? If early exercise never occurs, explain why not. For the followi...

Q: The price of a 6-month dollar-denominated call option

The price of a 6-month dollar-denominated call option on the euro with a $0.90 strike is $0.0404. The price of an otherwise equivalent put option is $0.0141. The annual continuously compounded dollar...

Q: a. Suppose you enter into a short 6-month forward

a. Suppose you enter into a short 6-month forward position at a forward price of $50. What is the payoff in 6 months for prices of $40, $45, $50, $55, and $60? b. Suppose you buy a 6-month put option...

Q: Compute estimated profit in 1 year if XYZ buys a put option

Compute estimated profit in 1 year if XYZ buys a put option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case.

Q: Repeat the previous problem, only use Monte Carlo simulation.

Repeat the previous problem, only use Monte Carlo simulation. Repeat the previous problem Using the delta-approximation method and assuming a $10m investment in stock A, compute the 95% and 99% 1-, 1...

Q: In Example 10.2, a forward contract was used to

In Example 10.2, a forward contract was used to establish a derivatives “hedge” toprotect Centralia from a translation loss if the euro depreciated from â ...

Q: Do problem 9 again assuming an American put option instead of a

Do problem 9 again assuming an American put option instead of a call option. Data from Problem 9: Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the minimum...

Q: List the arguments (variables) of which an FX call or

List the arguments (variables) of which an FX call or put option model price is afunction. How do the call and put premiums change with respect to a change in thearguments?

Q: Suppose your company has purchased a put option on the euro to

Suppose your company has purchased a put option on the euro to manageexchange exposure associated with an account receivable denominated in that currency.In this case, your company can be said to have...

Q: Airbus sold an A400 aircraft to Delta Airlines, a U.

Airbus sold an A400 aircraft to Delta Airlines, a U.S. company, and billed $30 millionpayable in six months. Airbus is concerned about the euro proceeds from internationalsales and would like to contr...

Q: Suppose that you hold a share of stock and a put option

Suppose that you hold a share of stock and a put option on that share. What is the payoff when the option expires if (a) the stock price is below the exercise price? (b) the stock price is above the...

Q: There is another strategy involving calls and borrowing or lending that gives

There is another strategy involving calls and borrowing or lending that gives the same payoffs as the strategy described in Problem 3. What is the alternative strategy? Problem#3: Suppose that you ho...

Q: Suppose you buy a one-year European call option on Wombat

Suppose you buy a one-year European call option on Wombat stock with an exercise price of $100 and sell a one-year European put option with the same exercise price. The current stock price is $100, an...

Q: Discuss briefly the risks and payoffs of the following positions:

Discuss briefly the risks and payoffs of the following positions: a. Buy stock and a put option on the stock. b. Buy stock. c. Buy call. d. Buy stock and sell call option on the stock. e. Buy bond. f....

Q: A European call and put option have the same maturity and both

A European call and put option have the same maturity and both are at the money. The stock does not pay a dividend. Which option should sell for the higher price? Explain.

Q: Suppose that Mr. Colleoni borrows the present value of $100

Suppose that Mr. Colleoni borrows the present value of $100, buys a six month put option on stock Y with an exercise price of $150, and sells a six-month put option on Y with an exercise price of $50....

Q: Some years ago the Australian firm Bond Corporation sold a share in

Some years ago the Australian firm Bond Corporation sold a share in some land that it owned near Rome for $110 million and as a result boosted its annual earnings by $74 million. A television program...

Q: Suppose that you own an American put option on Bufflehead stock (

Suppose that you own an American put option on Bufflehead stock (see Problem 12) with an exercise price of $220. a. Would you ever want to exercise the put early? b. Calculate the value of the put....

Q: The current price of the stock of Mont Tremblant Air is C

The current price of the stock of Mont Tremblant Air is C$100. During each six-month period it will either rise by 11.1% or fall by 10% (equivalent to an annual standard deviation of 14.9%). The inter...

Q: Other things equal, which of these American options are you most

Other things equal, which of these American options are you most likely to want to exercise early? a. A put option on a stock with a large dividend or a call on the same stock. b. A put option on a...

Q: Use the put-call parity formula (see Section 20-

Use the put-call parity formula (see Section 20-2) and the one-period binomial model to show that the option delta for a put option is equal to the option delta for a call option minus 1. Section 20-2...

Q: In Section 21-1 we used a simple one-step

In Section 21-1 we used a simple one-step model to value two Google options each with an exercise price of $530. We showed that the call option could be replicated by borrowing $233.22 and investing $...

Q: Redo the example in Figure 22.8, assuming that the

Redo the example in Figure 22.8, assuming that the real option is a put option allowing the company to abandon the R&D program if commercial prospects are sufficiently poor at year 2. Use put&acir...

Q: Use the Black–Scholes formula to value the following options:

Use the Black–Scholes formula to value the following options: a. A call option written on a stock selling for $60 per share with a $60 exercise price. The stock’s standard deviation is 6% per month....

Q: A gold-mining firm is concerned about short-term volatility

A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,300 an ounce, but the price is extremely volatile and could fall as low as $1,220 or rise as hi...

Q: Define each of the following terms: a. Option;

Define each of the following terms: a. Option; call option; put option b. Exercise value; strike price c. Black-Scholes option pricing model

Q: If you buy a put option on a $100,000

If you buy a put option on a $100,000 Treasury bond futures contract with an exercise price of 95 and the price of the Treasury bond is 120 at expiration, is the contract in the money, out of the mone...

Q: Why does a lower strike price imply that a call option will

Why does a lower strike price imply that a call option will have a higher premium and a put option a lower premium?

Q: Consider a call option with an exercise rate of x on an

Consider a call option with an exercise rate of x on an interest rate, which we shall denote as simply L. The underlying rate is an M-day rate and pays off based on 360 days in a year. Now consider a...

Q: Explain how the stockholders of a company hold an implicit put option

Explain how the stockholders of a company hold an implicit put option written by the creditors.

Q: Consider a call option on an asset with an exercise price of

Consider a call option on an asset with an exercise price of $100, a put option on that same asset with an exercise price of $100, and a forward contract on the asset with an exercise price of $100, a...

Q: Suppose you observe a one-year cash-or-nothing

Suppose you observe a one-year cash-or-nothing digital call option trading for $0.48 and an equivalent cash-or-nothing digital put option trading for $0.45. Calculate the implied interest rate (annual...

Q: A non-dividend-paying common stock is trading at $

A non-dividend-paying common stock is trading at $100. Suppose you are considering a European put option with a strike price of $110 and one year to expiration. What is the annually compounded risk-fr...

Q: Why do higher interest rates lead to higher call option prices but

Why do higher interest rates lead to higher call option prices but lower put option prices?

Q: Use the Excel spreadsheet BlackScholesMerton Binomial10e.xlsm and determine the value

Use the Excel spreadsheet BlackScholesMerton Binomial10e.xlsm and determine the value of a call option and a put option on a stock currently priced at 100, where the risk-free rate is 5 percent (compo...

Q: A stock has a current price of $132.43.

A stock has a current price of $132.43. For a particular European put option that expires in three weeks, the probability of the option expiring in-the-money is 63.68 percent and the annualized volati...

Q: Consider a European put option that expires in weeks with an exercise

Consider a European put option that expires in weeks with an exercise price of $120 trading on a stock currently priced at $126.30. Assuming an annualized volatility of the continuously compounded ret...

Q: Use the Black–Scholes–Merton European put option pricing formula

Use the Black–Scholes–Merton European put option pricing formula for the October 165 put option. Repeat parts a, b, and c of the previous problem with respect to the put.

Q: One way to create a bear spread positions is by purchasing a

One way to create a bear spread positions is by purchasing a high strike put option and selling a low strike put option. Identify a strategy with call options that creates a similar bear spread-shaped...

Q: Find the value of an American put option using the binomial option

Find the value of an American put option using the binomial option pricing model. The parameters are S 62, X 70, r 0.08, u 1.10, and d 0.95. There are no dividends. Use n 2 periods.

Q: Draw the payoff diagram for the following options: A.

Draw the payoff diagram for the following options: A. Call option to buy a venture’s stock at $3 B. Put option to sell a venture’s stock back to the venture at $15

Q: Match the items in the left-hand column with the descriptions

Match the items in the left-hand column with the descriptions/explanations in the right-hand column.

Q: On November 3, 20X2, PRD Corporation acquired 100 shares of

On November 3, 20X2, PRD Corporation acquired 100 shares of JRS Company at a cost of $12 per share. PRD classifies them as available-for-sale securities. On this same date, PRD decides to hedge agains...

Q: A trader writes 5 naked put option contracts with each contract being

A trader writes 5 naked put option contracts with each contract being on 100 shares. The option price is $10, the time to maturity is 6 months, and the strike price is $64. (a) What is the margin requ...

Q: Use DerivaGem to calculate the value of an American put option on

Use DerivaGem to calculate the value of an American put option on a non-dividendpaying stock when the stock price is $30, the strike price is $32, the risk-free rate is 5%, the volatility is 30%, and...

Q: Calls were traded on exchanges before puts. During the period of

Calls were traded on exchanges before puts. During the period of time when calls were traded but puts were not traded, how would you create a European put option on a nondividend- paying stock synthet...

Q: A European call option and put option on a stock both have

A European call option and put option on a stock both have a strike price of $20 and an expiration date in 3 months. Both sell for $3. The risk-free interest rate is 10% per annum, the current stock p...

Q: Consider a put option on a non-dividend-paying stock

Consider a put option on a non-dividend-paying stock when the stock price is $40, the strike price is $42, the risk-free interest rate is 2%, the volatility is 25% per annum, and the time to maturity...

Q: Describe the trading position created in which a call option is bought

Describe the trading position created in which a call option is bought with strike price K2 and a put option is sold with strike price K1 when both have the same time to maturity and K2 > K1. What doe...

Q: A stock price is currently $40. Over each of the

A stock price is currently $40. Over each of the next two 3-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 12% per annum with continuous compounding. (a)...

Q: Repeat Problem 13.25 for an American put option on a

Repeat Problem 13.25 for an American put option on a futures contract. The strike price and the futures price are $50, the risk-free rate is 10%, the time to maturity is 6 months, and the volatility i...

Q: A stock index is currently 990, the risk-free rate

A stock index is currently 990, the risk-free rate is 5%, and the dividend yield on the index is 2%. Use a three-step tree to value an 18-month American put option with a strike price of 1,000 when th...

Q: The appendix derives the key result / Show that

The appendix derives the key result Show that and use this to derive the Black–Scholes–Merton formula for the price of a European put option on a non-dividend-payin...

Q: Suppose that the spot price of the Canadian dollar is U.

Suppose that the spot price of the Canadian dollar is U.S. $0.95 and that the Canadian dollar/U.S. dollar exchange rate has a volatility of 8% per annum. The risk-free rates of interest in Canada and...

Q: A four-step Cox–Ross–Rubinstein binomial tree is

A four-step Cox–Ross–Rubinstein binomial tree is used to price a one-year American put option on an index when the index level is 500, the strike price is 500, the dividend yield is 2%, the risk-free...

Q: A bank has written a call option on one stock and a

A bank has written a call option on one stock and a put option on another stock. For the first option the stock price is 50, the strike price is 51, the volatility is 28% per annum, and the time to ma...

Q: In Problem 18.12, what does the binomial tree give

In Problem 18.12, what does the binomial tree give for the value of a six-month European put option on futures with a strike price of 60? If the put were American, would it ever be worth exercising it...

Q: In March, a U.S. investor instructs a broker

In March, a U.S. investor instructs a broker to sell one July put option contract on a stock. The stock price is $42 and the strike price is $40. The option price is $3. Explain what the investor has...

Q: On May 3, 2016, an investor owns 100 Google shares

On May 3, 2016, an investor owns 100 Google shares. As indicated in Table 1.3, the share price is about $696 and a December put option with a strike price of $660 costs $38.10. The investor is compari...

Q: What position is equivalent to a long forward contract to buy an

What position is equivalent to a long forward contract to buy an asset at K on a certain date and a put option to sell it for K on that date.

Q: Use the result in equation (15.17) to determine

Use the result in equation (15.17) to determine the value of a perpetual American put option on a non-dividend-paying stock with strike price K if it is exercised when the stock price equals H where H...

Q: A stock price follows geometric Brownian motion with an expected return of

A stock price follows geometric Brownian motion with an expected return of 16% and avolatility of 35%. The current price is $38. (a) What is the probability that a European call option on the stock w...

Q: A portfolio is currently worth $10 million and has a beta

A portfolio is currently worth $10 million and has a beta of 1.0. An index is currently standing at 800. Explain how a put option on the index with a strike price of 700 can be used to provide portfol...

Q: Show that, if C is the price of an American call

Show that, if C is the price of an American call with exercise price K and maturity T on a stock paying a dividend yield of q, and P is the price of an American put on the same stock with the same str...

Q: Show that a European call option on a currency has the same

Show that a European call option on a currency has the same price as the corresponding European put option on the currency when the forward price equals the strike price.

Q: Show that the formula in equation (17.12) for

Show that the formula in equation (17.12) for a put option to sell one unit of currency A for currency B at strike price K gives the same value as equation (17.11) for a call option to buy K units of...

Q: Suppose that a one-year futures price is currently 35.

Suppose that a one-year futures price is currently 35. A one-year European call option and a one-year European put option on the futures with a strike price of 34 are both priced at 2 in the market. T...

Q: Calculate the value of a five-month European futures put option

Calculate the value of a five-month European futures put option when the futures price is $19, the strike price is $20, the risk-free interest rate is 12% per annum, and the volatility of the futures...

Q: A European call option on a certain stock has a strike price

A European call option on a certain stock has a strike price of $30, a time to maturity of 1 year, and an implied volatility of 30%. A European put option on the same stock has a strike price of $30,...

Q: The market price of a European call is $3.00

The market price of a European call is $3.00 and its price given by Black–Scholes– Merton model with a volatility of 30% is $3.50. The price given by this Black–Scholes–Merton model for a European put...

Q: A 9-month American put option on a non-dividend

A 9-month American put option on a non-dividend-paying stock has a strike price of $49. The stock price is $50, the risk-free rate is 5% per annum, and the volatility is 30% per annum. Use a three-ste...

Q: A 1-year American put option on a non-dividend

A 1-year American put option on a non-dividend-paying stock has an exercise price of $18. The current stock price is $20, the risk-free interest rate is 15% per annum, and the volatility of the stock...

Q: A 2-month American put option on a stock index has

A 2-month American put option on a stock index has an exercise price of 480. The current level of the index is 484, the risk-free interest rate is 10% per annum, the dividend yield on the index is 3%...

Q: Calculate the price of a 3-month American put option on

Calculate the price of a 3-month American put option on a non-dividend-paying stock when the stock price is $60, the strike price is $60, the risk-free interest rate is 10% perannum, and the volatilit...

Q: Show by substituting for the various terms in equation (19.

Show by substituting for the various terms in equation (19.4) that the equation is true for: (a) A single European call option on a non-dividend-paying stock (b) A single European put option on a non-...

Q: An American put option on a non-dividend-paying stock

An American put option on a non-dividend-paying stock has 4 months to maturity. The exercise price is $21, the stock price is $20, the risk-free rate of interest is 10% perannum, and the volatility is...

Q: Prove the result in equation (11.7). (Hint

Prove the result in equation (11.7). (Hint: For the first part of the relationship, consider (a) a portfolio consisting of a European call plus an amount of cash equal to K, and (b) a portfolio consis...

Q: ‘‘Buying a put option on a stock when the stock is

‘‘Buying a put option on a stock when the stock is owned is a form of insurance.’’ Explain this statement.

Q: A stock price is currently $50. It is known that

A stock price is currently $50. It is known that at the end of 6 months it will be either $45 or $55. The risk-free interest rate is 10% per annum with continuous compounding. What is the value of a 6...

Q: The DerivaGem Application Builder functions enable you to investigate how the prices

The DerivaGem Application Builder functions enable you to investigate how the prices of options calculated from a binomial tree converge to the correct value as the number of time steps increases. (Se...

Q: Calculate the price of a 3-month European put option on

Calculate the price of a 3-month European put option on a non-dividend-paying stock with a strike price of $50 when the current stock price is $50, the risk-free interest rate is 10% per annum, and th...

Q: Consider a stock index currently standing at 250. The dividend yield

Consider a stock index currently standing at 250. The dividend yield on the index is 4% per annum, and the risk-free rate is 6% per annum. A three-month European call option on the index with a strike...

Q: Use the software DerivaGem to verify that Figures 11.1 and

Use the software DerivaGem to verify that Figures 11.1 and 11.2 are correct.

Q: Calculate the value of an eight-month European put option on

Calculate the value of an eight-month European put option on a currency with a strike price of 0.50. The current exchange rate is 0.52, the volatility of the exchange rate is 12%, the domestic risk-fr...

Q: Consider a four-month futures put option with a strike price

Consider a four-month futures put option with a strike price of 50 when the risk-free interest rate is 10% per annum. The current futures price is 47. What is a lower bound for the value of the future...

Q: Suppose that a futures price is currently 30. The risk-

Suppose that a futures price is currently 30. The risk-free interest rate is 5% per annum. A three-month American futures call option with a strike price of 28 is worth 4. Calculate bounds for the pri...

Q: A trader sells a strangle by selling a 6-month European

A trader sells a strangle by selling a 6-month European call option with a strike price of $50 for $3 and selling a 6-month European put option with a strike price of $40 for $4. For what range of pri...

Q: Suppose you buy a put option contract on October gold futures with

Suppose you buy a put option contract on October gold futures with a strike price of $1,400 per ounce. Each contract is for the delivery of 100 ounces. What happens if you exercise when the October fu...

Q: A European call and put option have the same strike price and

A European call and put option have the same strike price and time to maturity. The call has an implied volatility of 30% and the put has an implied volatility of 25%. What trades would you do?

Q: For the situation considered in Problem 13.5, what is

For the situation considered in Problem 13.5, what is the value of a 1-year European put option with a strike price of $100? Verify that the European call and European put prices, satisfy put–call par...

Q: Prove the result in equation (11.11). (Hint

Prove the result in equation (11.11). (Hint: For the first part of the relationship, consider (a) a portfolio consisting of a European call plus an amount of cash equal to D þ K, and (b) a portfolio c...

Q: Describe the profit from the following portfolio: a long forward contract

Describe the profit from the following portfolio: a long forward contract on an asset and a long European put option on the asset with the same maturity as the forward contract and a strike price tha...

Q: The price of a stock is $40. The price of

The price of a stock is $40. The price of a 1-year European put option on the stock with a strike price of $30 is quoted as $7 and the price of a 1-year European call option on the stock with a strike...

Q: In Business Snapshot 17.1, what is the cost of

In Business Snapshot 17.1, what is the cost of a guarantee that the return on the fund will not be negative over the next 10 years?

Q: What is the effect of an unexpected cash dividend on (a

What is the effect of an unexpected cash dividend on (a) a call option price and (b) a put option price?

Q: What is a lower bound for the price of a 2-

What is a lower bound for the price of a 2-month European put option on a non-dividend- paying stock when the stock price is $58, the strike price is $65, and the risk free interest rate is 5% per ann...

Q: The price of a European call that expires in 6 months and

The price of a European call that expires in 6 months and has a strike price of $30 is $2. The underlying stock price is $29, and a dividend of $0.50 is expected in 2 months and again in 5 months. Ris...

Q: What is a lower bound for the price of a 1-

What is a lower bound for the price of a 1-month European put option on a non-dividend- paying stock when the stock price is $12, the strike price is $15, and the risk-free interest rate is 6% per ann...

Q: The price of a non-dividend-paying stock is $

The price of a non-dividend-paying stock is $19 and the price of a 3-month European call option on the stock with a strike price of $20 is $1. The risk-free rate is 4% per annum. What is the price of...

Q: A trader buys a call option with a strike price of $

A trader buys a call option with a strike price of $45 and a put option with a strike price of $40. Both options have the same maturity. The call costs $3 and the put costs $4. Draw a diagram showing...

Q: A stock price is currently $80. It is known that

A stock price is currently $80. It is known that at the end of 4 months it will be either $75 or $85. The risk-free interest rate is 5% per annum with continuous compounding. What is the value of a 4-...

Q: A stock price is currently $40. It is known that

A stock price is currently $40. It is known that at the end of 3 months it will be either $45 or $35. The risk-free rate of interest with quarterly compounding is 8% per annum. Calculate the value of...

Q: For the situation considered in Problem 13.12, what is

For the situation considered in Problem 13.12, what is the value of a 6-month European put option with a strike price of $51? Verify that the European call and European put prices satisfy put–call par...

Q: Explain carefully the difference between writing a put option and buying a

Explain carefully the difference between writing a put option and buying a call option.

Q: A stock index is currently 1,500. Its volatility is

A stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per annum (continuously compounded) for all maturities and the dividend yield on the index is .5%. Calculate values fo...

Q: The futures price of a commodity is $90. Use a

The futures price of a commodity is $90. Use a three-step tree to value (a) a 9-month American call option with strike price $93 and (b) a 9-month American put option with strike price $93. The volati...

Q: A call option with a strike price of $50 costs $

A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3. Explain how a strangle can be created from these two options. What is the pattern of profits from t...

Q: Calculate the price of a six-month European put option on

Calculate the price of a six-month European put option on the spot value of the S&P 500. The six-month forward price of the index is 1,400, the strike price is 1,450, the risk-free rate is 5%, and the...

Q: An American put option to sell a Swiss franc for dollars has

An American put option to sell a Swiss franc for dollars has a strike price of $0.80 and a time to maturity of 1 year. The Swiss franc’s volatility is 10%, the dollar interest rate is 6%, the Swiss fr...

Q: A stock index currently stands at 300 and has a volatility of

A stock index currently stands at 300 and has a volatility of 20%. The risk-free interest rate is 8% and the dividend yield on the index is 3%. Use a three-step binomial tree to value a six-month put...

Q: A trader creates a bear spread by selling a 6-month

A trader creates a bear spread by selling a 6-month put option with a $25 strike price for $2.15 and buying a 6-month put option with a $29 strike price for $4.75. What is the initial investment? What...

Q: What is the price of a European put option on a non

What is the price of a European put option on a non-dividend-paying stock when the stock price is $69, the strike price is $70, the risk-free interest rate is 5% per annum, the volatility is 35% per a...

Q: Suppose that USD/sterling spot and forward exchange rates are as

Suppose that USD/sterling spot and forward exchange rates are as follows: What opportunities are open to an arbitrageur in the following situations? (a) A 180-day European call option to buy Â&p...

Q: Suppose that a European put option to sell a share for $

Suppose that a European put option to sell a share for $60 costs $8 and is held until maturity. Under what circumstances will the seller of the option (the party with the short position) make a profit...

Q: A 1-month European put option on a non-dividend

A 1-month European put option on a non-dividend-paying stock is currently selling for $2:50. The stock price is $47, the strike price is $50, and the risk-free interest rate is 6% per annum. What oppo...

Q: Describe the terminal value of the following portfolio: a newly entered

Describe the terminal value of the following portfolio: a newly entered-into long forward contract on an asset and a long position in a European put option on the asset with the same maturity as the f...

Q: Use a three-step tree to value an American futures put

Use a three-step tree to value an American futures put option when the futures price is 50, the life of the option is 9 months, the strike price is 50, the risk-free rate is 3%, and the volatility is...

Q: A trader sells a put option with a strike price of $

A trader sells a put option with a strike price of $40 for $5. What is the trader’s maximum gain and maximum loss? How does your answer change if it is a call option?

Q: A trader has a put option contract to sell 100 shares of

A trader has a put option contract to sell 100 shares of a stock for a strike price of $60. What is the effect on the terms of the contract of (a) A $2 dividend being declared (b) A $2 dividend being...

Q: There is a European put option on a stock that expires in

There is a European put option on a stock that expires in two months. The stock price is $82, and the standard deviation of the stock returns is 70 percent. The option has a strike price of $90, and t...

Q: Suppose a certain stock currently sells for $30 per share.

Suppose a certain stock currently sells for $30 per share. If a put option and a call option are available with $30 exercise prices, which do you think will sell for more? Explain.

Q: T-bills currently yield 3.9 percent. Stock in

T-bills currently yield 3.9 percent. Stock in Nina Manufacturing is currently selling for $63 per share. There is no possibility that the stock will be worth less than $61 per share in one year. a. Wh...

Q: Suppose the interest rate on T-bills suddenly and unexpectedly rises

Suppose the interest rate on T-bills suddenly and unexpectedly rises. All other things being the same, what is the impact on call option values? On put option values?

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics?

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics?

Q: What are the deltas of a call option and a put option

What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?

Q: Pricing Model Rob wishes to buy a European put option on BioLabs

Pricing Model Rob wishes to buy a European put option on BioLabs, Inc., a non-dividend-paying common stock, with a strike price of $50 and six months until expiration. The company’s common stock is cu...

Q: Pricing Model Maverick Manufacturing, Inc., must purchase gold in three

Pricing Model Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $1,380 per ou...

Q: An investor is said to take a position in a “collar

An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options sh...

Q: McLemore Industries has a zero coupon bond issue that matures in two

McLemore Industries has a zero coupon bond issue that matures in two years with a face value of $75,000. The current value of the company’s assets is $46,000, and the standard deviation of the return...

Q: Brozik Corp. has a zero coupon bond that matures in five

Brozik Corp. has a zero coupon bond that matures in five years with a face value of $40,000. The current value of the company’s assets is $38,000, and the standard deviation of its return on assets is...

Q: The put–call parity condition is altered when dividends are paid

The put–call parity condition is altered when dividends are paid. The dividend-adjusted put–call parity formula is: where d is again the continuously compounded d...

Q: In the chapter we noted that the delta for a put option

In the chapter we noted that the delta for a put option is N(d1) − 1. Is this the same thing as −N(−d1)? (Hint: Yes, but why?)

Q: A stock is currently selling for $47 per share. A

A stock is currently selling for $47 per share. A call option with an exercise price of $50 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, comp...

Q: A put option that expires in six months with an exercise price

A put option that expires in six months with an exercise price of $75 sells for $4.89. The stock is currently priced at $72, and the risk-free rate is 3.6 percent per year, compounded continuously. Wh...

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $85 and three months to expiration sell for $6.18 and $5.09, respectively. If the risk-free rate is 4.8 percent per year, compounded continuous...

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $55 expire in two months and sell for $2.65 and $5.32, respectively. If the stock is currently priced at $57.30, what is the annual continuousl...

Q: On January 1, Year 1, the company wrote a put

On January 1, Year 1, the company wrote a put option agreeing to purchase 100 shares of its own stock for $50 per share on December 31, Year 2, at the option of the purchaser of the put option. The ma...

Q: When a corporation writes a put option on its own shares,

When a corporation writes a put option on its own shares, what does the corporation receive? What does the corporation agree to do?

Q: Suppose there were call options and forward contracts available on coal,

Suppose there were call options and forward contracts available on coal, but no put options. Show how a financial engineer could synthesize a put option using the available contracts. What does your a...

Q: Suppose a financial manager buys call options on 50,000 barrels

Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $65 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise p...

Q: Explain why a put option on a bond is conceptually the same

Explain why a put option on a bond is conceptually the same as a call option on interest rates.

Q: Given its experience, Garnier Corporation expects that it will sell goods

Given its experience, Garnier Corporation expects that it will sell goods to a foreign customer at a price of 1 million lire on March 15, Year 2. To hedge this forecasted transaction, a three-month pu...

Q: Assuming a forward contract to sell 100,000 Israeli shekels was

Assuming a forward contract to sell 100,000 Israeli shekels was entered into on December 1, Year 1, as a fair value hedge of a foreign currency receivable, what would be the net impact on net income i...

Q: On September 1, 2017, Jensen Company received an order to

On September 1, 2017, Jensen Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. Jensen shipped the machine and received payment on March 1, 201...

Q: On September 1, 2017, Jensen Company received an order to

On September 1, 2017, Jensen Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. Jensen shipped the machine and received payment on March 1, 201...

Q: On September 1, 2017, Jensen Company received an order to

On September 1, 2017, Jensen Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. Jensen shipped the machine and received payment on March 1, 201...

Q: The Pier Ten Company, a U.S. company,

The Pier Ten Company, a U.S. company, made credit sales to four customers in Asia on September 15, 2015, and received payment on October 15, 2015. Information related to these sales is as follows The...

Q: On June 1, Alexander Corporation sold goods to a foreign customer

On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,000,000 pesos and will receive payment in three months on September 1. On June 1, Alexander acquired an option to sell...

Q: On June 1, Vandervelde Corporation (a U.S.-

On June 1, Vandervelde Corporation (a U.S.-based manufacturing firm) received an order to sell goods to a foreign customer at a price of 100,000 leks. Vandervelde will ship the goods and receive payme...

Q: On March 17, Kennedy Baking, Inc., committed to buy

On March 17, Kennedy Baking, Inc., committed to buy 1,000 tons of commodity A for delivery in May at a cost of $118 per ton. Concerned that the price of commodity A might decrease, on March 29 the com...

Q: During the third quarter of the current year, Beamer Manufacturing Company

During the third quarter of the current year, Beamer Manufacturing Company invested in derivative instruments for a variety of reasons. The various investments and hedging relationships are as follows...

Q: Casper Enterprises is forecasting two significant transactions and is concerned that adverse

Casper Enterprises is forecasting two significant transactions and is concerned that adverse price movements could negatively impact these transactions. In order to hedge against adverse movements, Ca...

Q: In Problem 18, suppose a put option with a $40

In Problem 18, suppose a put option with a $40 strike is also available with a premium of $2.80. Calculate your percentage return for the six-month holding period if the stock price declines to $36 pe...

Q: A call option is currently selling for $3. It has

A call option is currently selling for $3. It has a strike price of $65 and six months to maturity. What is the price of a put option with a $65 strike price and six months to maturity? The current st...

Q: A stock with a current price of $58 has a put

A stock with a current price of $58 has a put option available with a strike price of $55. The stock will move up by a factor of 1.13 or down by a factor of 0.88 over the next period and the risk-free...

Q: A stock is currently priced at $35 and will move up

A stock is currently priced at $35 and will move up by a factor of 1.18 or down by a factor of 0.85 each period over each of the next two periods. The risk-free rate of interest is 3 percent. What is...

Q: Suppose you hold LLL employee stock options representing options to buy 10

Suppose you hold LLL employee stock options representing options to buy 10,000 shares of LLL stock. You wish to hedge your position by buying put options with three-month expirations and a $22.50 stri...

Q: Immediately after establishing your put options hedge, volatility for LLL stock

Immediately after establishing your put options hedge, volatility for LLL stock suddenly jumps to 45 percent. This changes the number of put options required to hedge your employee stock options. How...

Q: Suppose you write 15 put option contracts with a $45 strike

Suppose you write 15 put option contracts with a $45 strike. The premium is $2.40. Evaluate your potential gains and losses at option expiration for stock prices of $35, $45, and $55.

Q: Buying a put option on a stock you own is sometimes called

Buying a put option on a stock you own is sometimes called “stock price insurance.” Why?

Q: She would like to compute the value of the corresponding put option

She would like to compute the value of the corresponding put option for Option 1. Which of the following is closest to Ms. Barlow’s answer? a. $3.79 b. $3.94 c. $4.41

Q: Suppose you buy one SPX put option with a strike of 2100

Suppose you buy one SPX put option with a strike of 2100 and write one SPX put option with a strike of 2125. What are the payoffs at maturity to this position for S&P 500 Index levels of 2000, 2050, 2...

Q: Suppose you buy one SPX call option with a strike of 2100

Suppose you buy one SPX call option with a strike of 2100 and write one SPX put option with a strike of 2100. What are the payoffs at maturity to this position for S&P 500 Index levels of 2000, 2050,...

Q: The stock of Lead Zeppelin, a metal manufacturer, currently sells

The stock of Lead Zeppelin, a metal manufacturer, currently sells for $68 and has an annual standard deviation of 41 percent. The risk-free rate is 6 percent. What is the value of a put option with a...

Q: She would like to compute the value of the corresponding put option

She would like to compute the value of the corresponding put option for Option 2. Which of the following is closest to Ms. Barlow’s answer? a. $0.98 b. $1.41 c. $4.84

Q: Mr. Franklin wants to know how the put option in Exhibit

Mr. Franklin wants to know how the put option in Exhibit 1 behaves when all the parameters are held constant except delta. Which of the following is the best estimate of the change in the put option’s...

Q: A put option with a strike price of $50 sells for

A put option with a strike price of $50 sells for $3.20. The option expires in two months and the current stock price is $51. If the risk-free interest rate is 5 percent, what is the price of a call o...

Q: Mr. Franklin wants to compute the value of the put option

Mr. Franklin wants to compute the value of the put option that corresponds to the call value calculated in the previous question. Which of the following is the closest to his answer? a. $4.78 b. $5.55...

Q: Mr. Franklin is interested in the sensitivity of the put option

Mr. Franklin is interested in the sensitivity of the put option to changes in the volatility of the underlying equity’s returns. If the volatility of the underlying equity’s returns increases, the val...

Q: Suppose you buy 30 March 100 put option contracts. What is

Suppose you buy 30 March 100 put option contracts. What is your maximum gain? On the expiration date, Hendreeks is selling for $84.60 per share. How much is your options investment worth? What is your...

Q: What is the value of a put option if the underlying stock

What is the value of a put option if the underlying stock price is $42, the strike price is $35, the underlying stock volatility is 47 percent, and the risk-free rate is 5 percent? Assume the option h...

Q: A stock with an annual standard deviation of 30 percent currently sells

A stock with an annual standard deviation of 30 percent currently sells for $67. The risk-free rate is 3 percent. What is the value of a put option with a strike price of $80 and 60 days to expiration...

Q: A stock has a price of $32 and an annual return

A stock has a price of $32 and an annual return volatility of 45 percent. The risk-free rate is 3.0 percent. Using a computer spreadsheet program, calculate the call and put option prices with a strik...

Q: A call option is currently selling for $3.90.

A call option is currently selling for $3.90. It has a strike price of $45 and five months to maturity. The current stock price is $47 and the risk-free rate is 4 percent. The stock will pay a dividen...

Q: A call option is currently selling for $4.60.

A call option is currently selling for $4.60. It has a strike price of $60 and three months to maturity. A put option with the same strike price sells for $7.20. The risk-free rate is 6 percent and th...

Q: A put option is currently selling for $8.30.

A put option is currently selling for $8.30. It has a strike price of $80 and seven months to maturity. The current stock price is $83. The risk-free rate is 5 percent and the stock will pay a $1.40 d...

Q: Southwest Airlines Co. is a major airline that operates in the

Southwest Airlines Co. is a major airline that operates in the United States. Refer to the following information from Southwest Airlines’ 2015 3rd quarter 10-Q. 3. FINANCIAL DER...

Q: Repeat Problem 32.3 valuing a European put option with a

Repeat Problem 32.3 valuing a European put option with a strike of $87. What is the put–call parity relationship between the prices of European call and put options? Show that the pu...

Q: How can the value of a forward start put option on a

How can the value of a forward start put option on a non-dividend-paying stock be calculated if it is agreed that the strike price will be 10% greater than the stock price at the time the option start...

Q: Use a three-time-step tree to value an American

Use a three-time-step tree to value an American put option on the geometric average of the price of a non-dividend-paying stock when the stock price is $40, the strike price is $40, the risk-free inte...

Q: Consider a European put option on a non-dividend paying stock

Consider a European put option on a non-dividend paying stock when the stock price is $100, the strike price is $110, the risk-free rate is 5% per annum, and the time to maturity is one year. Suppose...

Q: Use the Black’s model to value a 1-year European put

Use the Black’s model to value a 1-year European put option on a 10-year bond. Assume that the current cash price of the bond is $125, the strike price is $110, the 1-year risk-free interest rate is 1...

Q: If the yield volatility for a 5-year put option

If the yield volatility for a 5-year put option on a bond maturing in 10 years’ time is specified as 22%, how should the option be valued? Assume that, based on today’s interest rates the modified du...

Q: Use the answer to Problem 32.5 and put–call

Use the answer to Problem 32.5 and put–call parity arguments to calculate the price of a put option that has the same terms as the call option in Problem 32.5.

Q: Repeat the analysis in Section 27.8 for the put option

Repeat the analysis in Section 27.8 for the put option example on the assumption that the strike price is 1.13. Use both the least squares approach and the exercise boundary parameterization approach....

Q: Consider an 8-month European put option on a Treasury bond

Consider an 8-month European put option on a Treasury bond that currently has 14.25 years to maturity. The current cash bond price is $910, the exercise price is $900, and the volatility for the bond...

Q: Construct a trinomial tree for the Ho–Lee model where
.

Construct a trinomial tree for the Ho–Lee model where
. Suppose that the initial zero-coupon interest rate for a maturity of 0.5, 1.0, and 1.5 years are 7.5%, 8%, and 8.5%. Use two-time steps, each 6...

Q: Carry out a manual calculation to verify the option prices in Example

Carry out a manual calculation to verify the option prices in Example 29.2.

Q: What must happen to the price of the underlying stock for the

What must happen to the price of the underlying stock for the purchaser of a put option on the stock to make money? How does the writer of the put option make money?

Q: You have purchased a put option on Pfizer common stock. The

You have purchased a put option on Pfizer common stock. The option has an exercise price of $27 and Pfizer’s stock currently trades at $29. The option premium is $0.50 per contract. a. What is your ne...

Q: You have written a put option on Diebold Inc. common stock

You have written a put option on Diebold Inc. common stock. The option has an exercise price of $28 and Diebold’s stock currently trades at $30.50. The option premium is $0.75 per contract. a. What is...

Q: You have purchased a put option on Kimberly Clark common stock.

You have purchased a put option on Kimberly Clark common stock. The option has an exercise price of $95.00 and Kimberly Clark’s stock currently trades at $96.18. The option premium is $1.25 per contra...

Q: 1. On June 1, 2014, a U.S

1. On June 1, 2014, a U.S. firm contracts to sell equipment (with an asking price of 2,000,000 krona) in Sweden. The firm will take delivery and will pay for the equipment on August 1, 2014. 2. Spot r...

Q: Following is a sample of 12 Level-I CFA exam questions

Following is a sample of 12 Level-I CFA exam questions that deal with many of the topics covered in Chapters 14 and 15 of this text, including basic properties of options and futures, pricing characte...

Q: Dorothy Santosuosso does a lot of investing in the stock market and

Dorothy Santosuosso does a lot of investing in the stock market and is a frequent user of stock-index options. She is convinced that the market is about to undergo a broad retreat and has decided to b...

Q: Nick Fitzgerald holds a well-diversified portfolio of high-quality

Nick Fitzgerald holds a well-diversified portfolio of high-quality, large-cap stocks. The current value of Fitzgerald’s portfolio is $735,000, but he is concerned that the market is heading for a big...

Q: Repeat the analysis of problem 14.7, but this time

Repeat the analysis of problem 14.7, but this time focus on the Facebook call and put options in Figure 14.1 that have a strike price of $87.50. If you use put-call parity to find the price of Faceboo...

Q: Refer to Problem 14.9. What happens if you are

Refer to Problem 14.9. What happens if you are wrong and the price of XLB increases to $25 on the expiration date? Problem 14.9: You believe that oil prices will be rising more than expected and tha...

Q: Suppose that a call option with a strike price of $45

Suppose that a call option with a strike price of $45 expires in one year and has a current market price of $5.16. The market price of the underlying stock is $46.21, and the risk-free rate is 1%. Use...

Q: You believe that oil prices will be rising more than expected and

You believe that oil prices will be rising more than expected and that rising prices will result in lower earnings for industrial companies that use a lot of petroleum-related products in their operat...

Q: An FI has a $100 million portfolio of six-year

An FI has a $100 million portfolio of six-year Eurodollar bonds that have an 8 percent coupon. The bonds are trading at par and have a duration of five years. The FI wishes to hedge the portfolio with...

Q: An FI has a $200 million asset portfolio that has an

An FI has a $200 million asset portfolio that has an average duration of 6.5 years. The average duration of its $160  million in liabilities is 4.5 years. Assets and liabilities are yielding 10 percen...

Q: What position is equivalent to a long forward contract to buy an

What position is equivalent to a long forward contract to buy an asset at K on a certain date and a long position in a European put option to sell it for K on that date?

Q: Johnstone Co. purchased a put option on Ewing common shares on

Johnstone Co. purchased a put option on Ewing common shares on July 7, 2017, for $240. The put option is for 200 shares, and the strike price is $70. (The market price of a share of Ewing stock on tha...

Q: Warren Co. purchased a put option on Echo common shares on

Warren Co. purchased a put option on Echo common shares on January 7, 2017, for $360. The put option is for 400 shares, and the strike price is $85 (which equals the price of an Echo share on the purc...

Q: On October 15, 2017, Oil Products Co. purchased 4

On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of $240,000 ($60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2018 heating se...

Q: On November 3, 20X2, PRD Corporation acquired 2 JRS Company

On November 3, 20X2, PRD Corporation acquired 2 JRS Company bonds ($1,000 face value) at a cost of 105. PRD classifies them as available-for-sale securities. On this same date, PRD decides to hedge ag...

Q: Match the items in the left-hand column with the descriptions

Match the items in the left-hand column with the descriptions/explanations in the right-hand column.

Q: The price of a stock that does not pay dividends is currently

The price of a stock that does not pay dividends is currently $35, and the risk-free rate is 4 percent. A European call option on the stock, with a strike price of $35 and which expires in six months,...

Q: What does the seller of a put option hope will happen?

What does the seller of a put option hope will happen?

Q: Suppose that you own a call option and a put option on

Suppose that you own a call option and a put option on the same stock and that these options have the same exercise price. Explain how the relative values of these two options will change as the stock...

Q: You are considering buying a three-month put option on Wing

You are considering buying a three-month put option on Wing and a Prayer Construction stock. The company’s stock currently trades for $10 per share and its price will either rise to $15 or fall to $7...

Q: You hold a European put option on Tubes, Inc., stock

You hold a European put option on Tubes, Inc., stock, with a strike price of $100. Things haven’t been going too well for Tubes. The current stock price is $2, and you think that it will either rise t...

Q: Consider the payoff structures of the following two portfolios: a

Consider the payoff structures of the following two portfolios: a. Buying a one month call option on one share of stock at a strike price of $50 and saving the present value of $50 (so that at expirat...

Q: What is a put option, and what do the payoff functions

What is a put option, and what do the payoff functions for the owner and seller of a put option look like?

Q: Why are the variables that affect the value of a put option

Why are the variables that affect the value of a put option the same as those that affect the value of a call option?

Q: What is the payoff for a put option with a strike price

What is the payoff for a put option with a strike price of $50 if the stock price at expiration is $40? What if the stock price is $65?

Q: The market value of Whole Foods stock is currently $53.

The market value of Whole Foods stock is currently $53.73 per share, and the annual risk-free rate is 3 percent. A three-month call option on the stock with a strike price of $55 sells for $2.15. What...

Q: ADCAP International is a U.S.-based company which sells

ADCAP International is a U.S.-based company which sells its products primarily in overseas markets. The company’s stock is currently trading at $50 per share. Depending on the outcome of U.S. trade ne...

Q: Options can be combined to create more complicated payoff structures. Consider

Options can be combined to create more complicated payoff structures. Consider the combination of one put option and one call option with the same expiration date and the same strike price. Draw the p...

Q: What is the value of a put option at maturity? Based

What is the value of a put option at maturity? Based on your answer, what is the intrinsic value of a put option?

Q: The put-call parity condition is altered when dividends are paid.

The put-call parity condition is altered when dividends are paid. The dividend adjusted put-call parity formula is:S × e dt + P =E × e Rt + Cwhere d is again the continuously compounded dividend yield...

Q: Suppose a financial manager buys call options on 50,000 barrels

Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $57 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise p...

Q: Refer to Table 23.2 in the text to answer this

Refer to Table 23.2 in the text to answer this question. Suppose you purchase the May 2017 put option on corn futures with a strike price of $3.80. Assume your purchase was at the last price. What is...

Q: T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is

T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is currently selling for $58 per share. There is no possibility that the stock will be worth less than $50 per share in one year.a....

Q: A call option with an exercise price of $25 and

A call option with an exercise price of $25 and four months to expiration has a price of $2.75. The stock is currently priced at $23.80, and the risk-free rate is 2.5 percent per year, compounded cont...

Q: A stock is currently selling for $67 per share. A

A stock is currently selling for $67 per share. A call option with an exercise price of $70 sells for $3.21 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, comp...

Q: A put option that expires in six months with an

A put option that expires in six months with an exercise price of $45 sells for $2.34. The stock is currently priced at $48, and the risk-free rate is 3.5 percent per year, compounded continuously. Wh...

Q: A put option and a call option with an exercise

A put option and a call option with an exercise price of $70 and three months to expiration sell for $1.30 and $6.25, respectively. If the risk-free rate is 3.1 percent per year, compounded continuous...

Q: A put option and call option with an exercise price

A put option and call option with an exercise price of $50 expire in four months and sell for $5.99 and $8.64, respectively. If the stock is currently priced at $52.27, what is the annual continuously...

Q: What are the prices of a call option and a

What are the prices of a call option and a put option with the following characteristics?,,,

Q: What are the deltas of a call option and a

What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?,,,

Q: Zevon Industries has a zero coupon bond issue that matures

Zevon Industries has a zero coupon bond issue that matures in two years with a face value of $40,000. The current value of the company’s assets is $26,700, and the standard deviation of the return on...

Q: Colosseum Corp. has a zero coupon bond that matures in

Colosseum Corp. has a zero coupon bond that matures in five years with a face value of $65,000. The current value of the company’s assets is $62,000, and the standard deviation of its return on assets...

Q: Suppose a financial manager buys call options on 50,000 barrels

Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $57 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise p...

Q: Refer to Table 23.2 in the text to answer this

Refer to Table 23.2 in the text to answer this question. Suppose you purchase the May 2017 put option on corn futures with a strike price of $3.80. Assume your purchase was at the last price. What is...

Q: T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is

T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is currently selling for $58 per share. There is no possibility that the stock will be worth less than $50 per share in one year.a....

Q: A call option with an exercise price of $25 and

A call option with an exercise price of $25 and four months to expiration has a price of $2.75. The stock is currently priced at $23.80, and the risk-free rate is 2.5 percent per year, compounded cont...

Q: A stock is currently selling for $67 per share. A

A stock is currently selling for $67 per share. A call option with an exercise price of $70 sells for $3.21 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, comp...

Q: A put option that expires in six months with an

A put option that expires in six months with an exercise price of $45 sells for $2.34. The stock is currently priced at $48, and the risk-free rate is 3.5 percent per year, compounded continuously. Wh...

Q: A put option and a call option with an exercise

A put option and a call option with an exercise price of $70 and three months to expiration sell for $1.30 and $6.25, respectively. If the risk-free rate is 3.1 percent per year, compounded continuous...

Q: A put option and call option with an exercise price

A put option and call option with an exercise price of $50 expire in four months and sell for $5.99 and $8.64, respectively. If the stock is currently priced at $52.27, what is the annual continuously...

Q: What are the prices of a call option and a

What are the prices of a call option and a put option with the following characteristics?,,,

Q: What are the deltas of a call option and a

What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?,,,

Q: Zevon Industries has a zero coupon bond issue that matures

Zevon Industries has a zero coupon bond issue that matures in two years with a face value of $40,000. The current value of the company’s assets is $26,700, and the standard deviation of the return on...

Q: Colosseum Corp. has a zero coupon bond that matures in

Colosseum Corp. has a zero coupon bond that matures in five years with a face value of $65,000. The current value of the company’s assets is $62,000, and the standard deviation of its return on assets...

Q: The BWS Corporation stock is selling at $50 a share today

The BWS Corporation stock is selling at $50 a share today. a. Calculate the value of a BWS put option if its exercise price is $40 and it expires today. b. What can you say about the value of a BWS...

Q: The current price of a stock is $ 33,and the

The current price of a stock is $ 33,and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a...

Q: The current price of a stock is $107. You expect

The current price of a stock is $107. You expect the price of the stock to be in the range of $105 to $115 in the next period. The call option with an exercise price of $115 is $1.30; the put option w...

Q: QBV, a non‐dividend‐paying stock, is currently

QBV, a non‐dividend‐paying stock, is currently trading for $100 a share. There is a 25‐percent chance that the stock will trade for $85 in one year, and a 75‐percent chance that the price will increas...

Q: What is the price of a put option with a strike price

What is the price of a put option with a strike price of $50 and six months to maturity when the stock price is currently trading at $45? Assume the stock‐price variance is 0.5 and the risk‐free rate...

Q: Assume stock XYZ does not pay dividends and has a market value

Assume stock XYZ does not pay dividends and has a market value of $98 per share. There is a 60‐percent chance that the stock will trade for $130 in one year, and a 40‐ percent chance that it will trad...

Q: Contrast the payoff from a put option with that from a call

Contrast the payoff from a put option with that from a call option.

Q: FinCorp Inc. has both a call option and a put option

FinCorp Inc. has both a call option and a put option with exercise prices of $50. Both expire in one year. The call is currently selling for $10 per share, while the put is currently selling for $2 pe...

Q: Ed Martin, the pension fund manager for Stark Corporation, is

Ed Martin, the pension fund manager for Stark Corporation, is considering purchase of a put option in anticipation of a price decline in the stock of Carlisle Inc. The option to sell 100 shares of Car...

Q: The current price of a stock is $33, and the

The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a...

Q: In mid-February 2016, European-style options on the

In mid-February 2016, European-style options on the S&P 100 index (OEX) expiring in December 2017 were priced as follows: Given an interest rate of 0.40% for a December 2017 maturity (22 months...

Q: Suppose Amazon stock is trading for $500 per share, and

Suppose Amazon stock is trading for $500 per share, and Amazon pays no dividends. a. What is the maximum possible price of a call option on Amazon? b. What is the maximum possible price of a put optio...

Q: Consider the data for IBM options in Problem 3. Suppose a

Consider the data for IBM options in Problem 3. Suppose a new American-style put option on IBM is issued with a strike price of $155 and an expiration date of November 1st. a. What is the maximum poss...

Q: Consider an American put option on XAL stock with a strike price

Consider an American put option on XAL stock with a strike price of $55 and one year to expiration. Assume XAL pays no dividends, XAL is currently trading for $10 per share, and the one-year interest...

Q: Suppose the S&P 500 is at 900, and it

Suppose the S&P 500 is at 900, and it will pay a dividend of $30 at the end of the year. Suppose also that the interest rate is 2%. If a one-year European put option has a negative time value, what is...

Q: Using the data in Table 21.1, compare the price

Using the data in Table 21.1, compare the price on July 24, 2009, of the following options on JetBlue stock to the price predicted by the Black-Scholes formula. Assume that the standard deviation of...

Q: Plot the value of a two-year European put option with

Plot the value of a two-year European put option with a strike price of $20 on World Wide Plants as a function of the stock price. Recall that World Wide Plants has a constant dividend yield of 5% per...

Q: Using the information in Problem 1, use the Binomial Model to

Using the information in Problem 1, use the Binomial Model to calculate the price of a oneyear put option on Estelle stock with a strike price of $25. Data from Problem 1: The current price of Estel...

Q: Using the information on Harbin Manufacturing in Problem 19, answer the

Using the information on Harbin Manufacturing in Problem 19, answer the following: a. Using the risk-neutral probabilities, what is the value of a one-year call option on Harbin stock with a strike pr...

Q: Consider the March 2010 $5 put option on JetBlue listed in

Consider the March 2010 $5 put option on JetBlue listed in Table 21.1. Assume that the volatility of JetBlue is 65% per year and its beta is 0.85. The short-term risk-free rate of interest is 1% per y...

Q: Using the information in Problem 3, use the Binomial Model to

Using the information in Problem 3, use the Binomial Model to calculate the price of a twoyear European put option on Natasha stock with a strike price of $7. Data from Problem 3: The current price...

Q: Suppose the option in Example 21.1 actually sold in the

Suppose the option in Example 21.1 actually sold in the market for $8. Describe a trading strategy that yields arbitrage profits. Example 21.1: Problem Suppose a stock is currently trading for $60,...

Q: Suppose the option in Example 21.2 actually sold today for

Suppose the option in Example 21.2 actually sold today for $5. You do not know what the option will trade for next period. Describe a trading strategy that will yield arbitrage profits. Example 21.2:...

Q: Eagletron’s current stock price is $10. Suppose that over the

Eagletron’s current stock price is $10. Suppose that over the current year, the stock price will either increase by 100% or decrease by 50%. Also, the risk-free rate is 25% (EAR). a. What is the value...

Q: Brondon Corp. purchased a put option on Mykia common shares on

Brondon Corp. purchased a put option on Mykia common shares on July 7, 2017 for $480. The put option is for 350 shares, and the strike price is $50. The option expires on January 31, 2018. The followi...

Q: Brondon Corp. purchased a put option on Mykia common shares on

Brondon Corp. purchased a put option on Mykia common shares on July 7, 2020, for $480. The put option is for 350 shares, and the strike price is $50. The option expires on January 31, 2021. The follow...

Q: Refer to Table 23.2 in the text to answer this

Refer to Table 23.2 in the text to answer this question. Suppose you purchase the July 2020 put option on corn futures with a strike price of $3.25. Assume your purchase was at the last price. What is...

Q: T-bills currently yield 3.4 percent. Stock in

T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is currently selling for $67 per share. There is no possibility that the stock will be worth less than $60 per share in one year. a...

Q: A call option with an exercise price of $25 and four

A call option with an exercise price of $25 and four months to expiration has a price of $3.10. The stock is currently priced at $25.19, and the risk-free rate is 2.5 percent per year, compounded cont...

Q: Zoso Industries has a zero coupon bond issue that matures in two

Zoso Industries has a zero coupon bond issue that matures in two years with a face value of $50,000. The current value of the company’s assets is $34,600, and the standard deviation of the return on a...

Q: Marshall Corp. has a zero coupon bond that matures in five

Marshall Corp. has a zero coupon bond that matures in five years with a face value of $75,000. The current value of the company’s assets is $71,000, and the standard deviation of its return on assets...

Q: The put-call parity condition is altered when dividends are paid

The put-call parity condition is altered when dividends are paid. The dividend-adjusted put-call parity formula is: S × e–dt + P = E × e–Rt + C where d is again the continuously compounded dividend yi...

Q: A stock is currently selling for $73 per share. A

A stock is currently selling for $73 per share. A call option with an exercise price of $70 sells for $5.27 and expires in three months. If the riskfree rate of interest is 2.6 percent per year, compo...

Q: A put option that expires in six months with an exercise price

A put option that expires in six months with an exercise price of $45 sells for $4.84. The stock is currently priced at $43, and the risk-free rate is 3.5 percent per year, compounded continuously. Wh...

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $65 and three months to expiration sell for $5.27 and $1.04, respectively. If the risk-free rate is 3.1 percent per year, compounded continuous...

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics? Stock price = $58 Exercise price = $60 Risk-free rate = 2.7% per year, compounded continuously Maturity = 4 mo...

Q: What are the deltas of a call option and a put option

What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?

Q: This problem pertains to the XYZ Company example in the body of

This problem pertains to the XYZ Company example in the body of the chapter and the associated discussion of real options. Required: 1. Define the term real option. Provide an example of each of the...

Q: Which security should sell at a greater price? a.

Which security should sell at a greater price? a. A 10-year Treasury bond with a 4% coupon rate versus a 10-year T-bond with a 5% coupon. b. A 3-month expiration call option with an exercise price of...

Q: Explain the difference between a put option and a short position in

Explain the difference between a put option and a short position in a futures contract.

Q: You are faced with the probability distribution of the HPR on the

You are faced with the probability distribution of the HPR on the stock market index fund given in Spreadsheet 5.1 of the text. Suppose the price of a put option on a share of the index fund with exer...

Q: Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes

Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes an Americanstyle option and a European-style option with the same strike price, expiration, and underlying stock. Fr...

Q: A stock index is currently trading at 50. Paul Tripp,

A stock index is currently trading at 50. Paul Tripp, CFA, wants to value 2-year index options using the binomial model. The stock will either increase in value by 20% or fall in value by 20%. The ann...

Q: Calculate the value of a put option with exercise price $100

Calculate the value of a put option with exercise price $100 using the data in Problem 36. Show that put-call parity is satisfied by your solution. Problem 36: You are attempting to value a call opti...

Q: Return to Problem 38. a. What will be the

Return to Problem 38. a. What will be the payoff to the put, Pu, if the stock goes up? b. What will be the payoff, Pd, if the stock price falls? c. Value the put option using the risk-neutral shortcut...

Q: In each of the following questions, you are asked to compare

In each of the following questions, you are asked to compare two options with parameters as given. The risk-free interest rate for all cases should be assumed to be 4%. Assume the stocks on which thes...

Q: We will derive a two-state put option value in this

We will derive a two-state put option value in this problem. Data: S0 = 100; X = 110; 1 + r = 1.10. The two possibilities for ST are 130 and 80. a. Show that the range of S is 50, whereas that of P is...

Q: Log in to Connect and link to Chapter 26 to find a

Log in to Connect and link to Chapter 26 to find a spreadsheet containing monthly values of the S&P 500 index. Suppose that in each month you had written an out-of-the-money put option on one unit of...

Q: What are the trade-offs facing an investor who is considering

What are the trade-offs facing an investor who is considering buying a put option on an existing portfolio?

Q: Consider the following options portfolio. You write a February 8 expiration

Consider the following options portfolio. You write a February 8 expiration call option on Microsoft with exercise price $100. You write a February 8 put option with exercise price $95. a. Graph the p...

Q: You write a put option with X = 100 and buy a

You write a put option with X = 100 and buy a put with X = 110. The puts are on the same stock and have the same expiration date. a. Draw the payoff graph for this strategy. b. Draw the profit graph f...

Q: The common stock of the C.A.L.L

The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $50 per share for months, and you believe it is going to stay in that range for the next three months. The price...

Q: We showed in the text that the value of a call option

We showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity theorem as well as a numerical example...

Q: A collar is established by buying a share of stock for $

A collar is established by buying a share of stock for $50, buying a 6-month put option with exercise price $45, and writing a 6-month call option with exercise price $55. On the basis of the volatili...

Q: You would like to be holding a protective put position on the

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $100 at year-end. XYZ currently sells for $100. Over the next year, the stock pr...

Q: Return to Example 21.1. Use the binomial model to

Return to Example 21.1. Use the binomial model to value a 1-year European put option with exercise price $110 on the stock in that example. Confirm that your solution for the put price satisfies put-c...

Q: Suppose that the risk-free interest rate is zero. Would

Suppose that the risk-free interest rate is zero. Would an American put option ever be exercised early? Explain

Q: Consider the following portfolio. You write a put option with exercise

Consider the following portfolio. You write a put option with exercise price 90 and buy a put option on the same stock with the same expiration date with exercise price 95. a. Plot the value of the po...

Q: A FinCorp put option with strike price 60 trading on the Acme

A FinCorp put option with strike price 60 trading on the Acme options exchange sells for $2. To your amazement, a FinCorp put with the same expiration selling on the Apex options exchange but with str...

Q: Assume a stock has a value of $100. The stock

Assume a stock has a value of $100. The stock is expected to pay a dividend of $2 per share at year-end. An at-the-money European-style put option with one-year expiration sells for $7. If the annual...

Q: You buy a share of stock, write a 1-year

You buy a share of stock, write a 1-year call option with X = $10, and buy a 1-year put option with X = $10. Your net outlay to establish the entire portfolio is $9.50. (a) What is the payoff of your...

Q: Joe Finance has just purchased a stock index fund, currently selling

Joe Finance has just purchased a stock index fund, currently selling at $2,400 per share. To protect against losses, Joe also purchased an at-the-money European put option on the fund for $120, with e...

Q: Demonstrate that an at-the-money call option on a

Demonstrate that an at-the-money call option on a given stock must cost more than an at themoney put option on that stock with the same expiration. The stock will pay no dividends until after the expi...

Q: The common stock of the P.U.T.T

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next three months. You...

Q: Find the Black-Scholes value of a put option on the

Find the Black-Scholes value of a put option on the stock in Problem 11 with the same exercise price and expiration as the call option. Data from problem 11: Time to expiration……………………………………6 months...

Q: Mark Washington, CFA, is an analyst with BIC. One

Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would experience a slight downturn and suggested delta-hedging the BIC portfolio. U.S. eq...

Q: According to the Black-Scholes formula, what will be the

According to the Black-Scholes formula, what will be the hedge ratio (delta) of a put option for a very small exercise price?

Q: The hedge ratio of an at-the-money call option

The hedge ratio of an at-the-money call option on IBM is .4. The hedge ratio of an at-the-money put option is −.6. What is the hedge ratio of an at-the-money straddle position on IBM?

Q: Is a put option on a high-beta stock worth more

Is a put option on a high-beta stock worth more than one on a low-beta stock? The stocks have identical firm-specific risk.

Q: Consider a stock that pays no dividends on which a futures contract

Consider a stock that pays no dividends on which a futures contract, a call option, and a put option trade. The maturity date for all three contracts is T, the exercise price of both the put and the c...

Q: The Cinco Centavo Company (CCC), a U.S.

The Cinco Centavo Company (CCC), a U.S. company, made credit sales to four customers in Asia on September 15, 2018, and received payment on October 15, 2018. Information related to these sales is as f...

Q: Puts. Raina bought a put option on 100 shares of a

Puts. Raina bought a put option on 100 shares of a stock for $230. The put gives her the option to sell XYZ stock for $45 a share if she exercises the option in the next ninety days. What is Raina’s r...

Q: Which security should sell at a greater price? a.

Which security should sell at a greater price? a. A 10-year Treasury bond with a 5% coupon rate or a 10-year T-bond with a 6% coupon. b. A three-month expiration call option with an exercise price o...

Q: What is the difference between a put option and a short position

What is the difference between a put option and a short position in a futures contract?

Q: The common stock of the C.A.L.L

The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $50 per share for months, and you believe it is going to stay in that range for the next three months. The price...

Q: Consider the following options portfolio: You write a November 2019 expiration

Consider the following options portfolio: You write a November 2019 expiration call option on Microsoft with exercise price $140. You also write a November expiration Microsoft put option with exercis...

Q: Consider the following portfolio. You write a put option with exercise

Consider the following portfolio. You write a put option with exercise price $90 and buy a put with the same expiration date with exercise price $95. a. Plot the value of the portfolio at the expirat...

Q: A put option with strike price $60 trading on the Acme

A put option with strike price $60 trading on the Acme options exchange sells for $2. To your amazement, a put on the firm with the same expiration selling on the Apex options exchange but with strike...

Q: You buy a share of stock, write a one-year

You buy a share of stock, write a one-year call option with X = $10, and buy a one-year put option with X = $10. Your net outlay to establish the entire portfolio is $9.50. What is the payoff of your...

Q: Joe Finance has just purchased a stock-index fund, currently

Joe Finance has just purchased a stock-index fund, currently selling at $2,400 per share. To protect against losses, Joe plans to purchase an at-the-money European put option on the fund for $120, wit...

Q: The following diagram shows the value of a put option at expiration

The following diagram shows the value of a put option at expiration: Which of the following statements about the value of the put option at expiration is true? a. The expiration value of the short po...

Q: Mark Washington, CFA, is an analyst with BIC. One

Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfo...

Q: Find the Black-Scholes value of a put option on the

Find the Black-Scholes value of a put option on the stock in the previous problem with the same exercise price and expiration as the call option.

Q: A put option on a stock with a current price of $

A put option on a stock with a current price of $33 has an exercise price of $35. The price of the corresponding call option is $2.25. According to put-call parity, if the effective annual risk-free r...

Q: All else being equal, is a put option on a highbeta

All else being equal, is a put option on a highbeta stock worth more than one on a low-beta stock? The firms have identical firm-specific risk

Q: According to the Black-Scholes formula, what will be the

According to the Black-Scholes formula, what will be the hedge ratio (delta) of a put option for a very small exercise price?

Q: The hedge ratio (delta) of an at-the-

The hedge ratio (delta) of an at-the-money call option on IBM is 0.4. The hedge ratio of an at-themoney put option is − 0.6. What is the hedge ratio of an at-the-money straddle position on IBM?

Q: A call option on Jupiter Motors stock with an exercise price of

A call option on Jupiter Motors stock with an exercise price of $75 and one-year expiration is selling at $3. A put option on Jupiter stock with an exercise price of $75 and one-year expiration is sel...

Q: A collar is established by buying a share of stock for $

A collar is established by buying a share of stock for $50, buying a six-month put option with exercise price $45, and writing a six-month call option with exercise price $55. Based on the volatility...

Q: a. Return to Example 16.1. Use the binomial

a. Return to Example 16.1. Use the binomial model to value a one-year European put option with exercise price $110 on the stock in that example. b. Show that your solution for the put price satisfies...

Q: You are a provider of portfolio insurance and are establishing a four

You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $100 million, and you promise to provide a minimum return of 0%. The equ...

Q: You would like to be holding a protective put position on the

You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $100 at year-end. XYZ currently sells for $100. Over the next year, the stock pr...

Q: We showed in the chapter that the value of a call option

We showed in the chapter that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the putcall parity relationship as well as a numerical...

Q: a. Return to Problem 37. What will be the payoff

a. Return to Problem 37. What will be the payoff to the put, Pu, if the stock goes up? b. What will be the payoff, Pd, if the stock price falls? c. Value the put option using the risk-neutral shortc...

Q: In each of the following questions, you are asked to compare

In each of the following questions, you are asked to compare two options with parameters as given. The risk-free interest rate for all cases should be assumed to be 6%. Assume the stocks on which thes...

Q: We will derive a two-state put option value in this

We will derive a two-state put option value in this problem. Data: S0 = 100; X = 110; 1 + r = 1.10. The two possibilities for ST are 130 and 80. a. Show that the range of S is 50 while that of P is 3...

Q: Log in to Connect, link to Chapter 20, and find

Log in to Connect, link to Chapter 20, and find there a spreadsheet containing monthly values of the S&P 500 Index. Suppose that in each month you had written an out-of-the-money put option on one uni...

Q: Use the Black-Scholes model to find the value for a

Use the Black-Scholes model to find the value for a European put option that has an exercise price of $62 and four months to expiration. The underlying stock is selling for $64 currently and pays an a...

Q: One month ago you purchased a put option on the S&

One month ago you purchased a put option on the S&P500 Index with an exercise price of $910. Today is the expiration date, and the index is at $900.96. a.Will you exercise the option? [Set as multi...

Q: A stock index is currently trading at 50. Paul Tripp,

A stock index is currently trading at 50. Paul Tripp, CFA, wants to value two-year index options using the binomial model. In any year, the stock will either increase in value by 20% or fall in value...

Q: Alice Duever purchased a put option on British pounds for $0

Alice Duever purchased a put option on British pounds for $0.04 per unit. The strike price was $1.80,and the spot rate at the time the pound option was exercised was $1.59. Assume there are 31,250 uni...

Q: Brian Tull sold a put option on Canadian dollars for $0

Brian Tull sold a put option on Canadian dollars for $0.03 per unit. The strike price was $0.75, and the spot rate at the time the option was exercised was $0.72. Assume Brian immediately sold the Can...

Q: One year ago, you sold a put option on 100,

One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $0.04 per unit; the exercise price was $1.22. Assume that one year...

Q: Reska, Inc., has constructed a long euro straddle. A

Reska, Inc., has constructed a long euro straddle. A call option on euros with an exercise price of $1.10 has a premium of $0.025 per unit. A euro put option has a premium of $0.017 per un...

Q: Refer to the previous question, but assume that the call and

Refer to the previous question, but assume that the call and put option premiums are $0.02 per unit and $0.015 per unit, respectively. (See Appendix B in this chapter.) a. Construct a contingency grap...

Q: The current spot rate of the Singapore dollar (S$) is

The current spot rate of the Singapore dollar (S$) is $0.50. The following option information is available: Call option premium on Singapore dollar (S$) $ 5 0.015. Put option premium on Singapore dol...

Q: Maggie Hawthorne is a currency speculator. She has noticed that recently

Maggie Hawthorne is a currency speculator. She has noticed that recently the euro has appreciated substantially against the U.S. dollar. The current exchange rate of the euro is $1.15. After reading a...

Q: Refer to the previous question, but assume that the call and

Refer to the previous question, but assume that the call and put option premiums are $0.035 per unit and $0.025 per unit, respectively. (See Appendix B in this chapter.) a. Construct a contingency gra...

Q: On July 2, the two-month futures rate of the

On July 2, the two-month futures rate of the Mexican peso contained a 2 percent discount (unannualized). A call option on pesos was available with an exercise price that was equal to the spot rate. In...

Q: The spot rate of the New Zealand dollar is $0.

The spot rate of the New Zealand dollar is $0.77. A call option on New Zealand dollars with a one-year expiration date has an exercise price of $0.78 and a premium of $0.04. A put option on New Zealan...

Q: When would a U.S. firm consider purchasing a call

When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging

Q: When should a speculator purchase a call option on Australian dollars?

When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?

Q: List the factors that affect currency put option premiums, and briefly

List the factors that affect currency put option premiums, and briefly explain the relationship that exists for each

Q: Jim Logan, owner of the Sports Exports Company, will be

Jim Logan, owner of the Sports Exports Company, will be receiving about 10,000 British pounds about one month from now as payment for exports produced and sent by his firm. Logan is concerned about hi...

Q: Your firm exports goods to the United Kingdom, and you believe

Your firm exports goods to the United Kingdom, and you believe that today’s forward rate of the British pound substantially underestimates the future spot rate. Company policy requires you to hedge yo...

Q: As treasurer of Tempe Corp., you are confronted with the following

As treasurer of Tempe Corp., you are confronted with the following problem. Assume the one-year forward rate of the British pound is $1.59. You plan to receive 1 million pounds in one year. A one-year...

Q: You believe that IRP presently exists. The nominal annual interest rate

You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14 percent, whereas the nominal annualinterest rate in the United States is 3 percent. You expect that annual infla...

Q: Brooks, Inc., imports wood from Morocco. The Moroccan exporter

Brooks, Inc., imports wood from Morocco. The Moroccan exporter invoices these products in Moroccan dirham. The current exchange rate of the dirham is $0.10. Brooks just purchased wood for 2 million di...

Q: Narto Co. (a U.S. firm) exports

Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in one year. The one-year U.S. interest rate is 5 percent when investing funds and 7 percent when borrowing f...

Q: Assume that interest rate parity exists. Today the one-year

Assume that interest rate parity exists. Today the one-year interest rate in Japan is the same as the one-yearinterest rate in the United States. You use the international Fisher effect when forecasti...

Q: Assume that the country of Dreeland has a currency (called the

Assume that the country of Dreeland has a currency (called the dree) that tends to move in tandem with the Chilean peso and is expected to continue to move in tandem with the Chilean peso in the futur...

Q: Blustream, Inc., considers a project in which it will sell

Blustream, Inc., considers a project in which it will sell the use of its technology to firms in Mexico. It already has received orders from Mexican firms that will generate 3 million Mexican pesos (M...

Q: The price of Garner stock is $40. There is also

The price of Garner stock is $40. There is also a call option on Garner stock that is at the money, with a premium of $2.00. There is a put option on Garner stock that is at the money, with a premium...

Q: A savings institution holds 50 percent of its assets as long-

A savings institution holds 50 percent of its assets as long-term, fixed rate mortgages. Almost all of its funds are in the form of short-term deposits. Which of the following strategies would be most...

Q: Smart Savings Bank desired to hedge its interest rate risk. It

Smart Savings Bank desired to hedge its interest rate risk. It was considering two possibilities: (1) sell Treasury bond futures at a price of 94-00, or (2) purchase a put option on Treasury bond futu...

Q: Purdue Savings and Loan Association purchased a put option on Treasury bond

Purdue Savings and Loan Association purchased a put option on Treasury bond futures with a September delivery date and an exercise price of 91-16. Assume the put option has a premium of 1-32. Assume t...

Q: Describe a put option on interest rate futures. How does it

Describe a put option on interest rate futures. How does it differ from selling a futures contract?

Q: A put option on Iowa stock specifies an exercise price of $

A put option on Iowa stock specifies an exercise price of $71. Today the stock’s price is $68. The premium on the put option is $8. Assume the option will not be exercised until matu...

Q: A put option on Indiana stock specifies an exercise price of $

A put option on Indiana stock specifies an exercise price of $23. Today the stock’s price is $24. The premium on the put option is $3. Assume the option will not be exercised until m...

Q: Why would a financial institution holding Hinton stock consider buying a put

Why would a financial institution holding Hinton stock consider buying a put option on that stock rather than simply selling it?

Q: You believe that oil prices will be rising more than expected and

You believe that oil prices will be rising more than expected and that rising prices will result in lower earnings for industrial companies that use a lot of petroleum-related products in their operat...

Q: Refer to Problem 14.10. What happens if you are

Refer to Problem 14.10. What happens if you are wrong and the price of QLT increases to $25 on the expiration date? Data from Problem 14.10: You believe that oil prices will be rising more than expec...

Q: Dorothy Santosuosso does a lot of investing in the stock market and

Dorothy Santosuosso does a lot of investing in the stock market and is a frequent user of stock-index options. She is convinced that the market is about to undergo a broad retreat and has decided to b...

Q: Nick Fitzgerald holds a well-diversified portfolio of high-quality

Nick Fitzgerald holds a well-diversified portfolio of high-quality large-cap stocks. The current value of Fitzgerald’s portfolio is $825,000, but he is concerned that the market is heading for a big f...

Q: Suppose that a call option with a strike price of $45

Suppose that a call option with a strike price of $45 expires in one year and has a current market price of $5.16. The market price of the underlying stock is $46.21, and the risk-free rate is 1%. Use...

Q: In the beginning of this chapter you read about open interest on

In the beginning of this chapter you read about open interest on Amazon put options. Suppose in January 2018, put and call options were available on Amazon stock with the following terms: Option Strik...

Q: Bernie Madoff perpetrated the world’s largest Ponzi scheme,1 in which

Bernie Madoff perpetrated the world’s largest Ponzi scheme,1 in which investors were initially estimated to have lost up to $65 billion. Essentially, investors were promisedâ&#...

Q: A European call option on a stock earns the owner an amount

A European call option on a stock earns the owner an amount equal to the price at expiration minus the exercise price, if the price of the stock on which the call is written exceeds the exercise price...

Q: Repeat parts a–d of the problem 24 for a six

Repeat parts a–d of the problem 24 for a six-month European put option with exercise price $40. Again, assume a current stock price of $35, a risk-free rate of 5%, and an annual volatility of 40%. Da...

Q: A European put option allows an investor to sell a share of

A European put option allows an investor to sell a share of stock at the exercise price on the exercise data. For example, if the exercise price is $48, and the stock price is $45 on the exercise date...

Q: Modify that the portfolio now contains 100 shares of stock and one

Modify that the portfolio now contains 100 shares of stock and one put option on the stock with the same parameters as in the example. You can assume that the price of an option is $81. Discuss in a b...

Q: If you own a stock, buying a put option on the

If you own a stock, buying a put option on the stock will greatly reduce your risk. This is the idea behind portfolio insurance. To illustrate, consider a stock that currently sells for $56 and has an...

Q: For the data in problem 24, the following is an example

For the data in problem 24, the following is an example of a butterfly spread: sell two calls with an exercise price of $50, buy one call with an exercise price of $40, and buy one call with an exerci...

Q: A stock currently sells for $69. The annual growth rate

A stock currently sells for $69. The annual growth rate of the stock is 15%, and the stock’s annual volatility is 35%. The risk-free rate is currently 5%. You have bought a six-month European put opti...

Q: Charles has a problem. His boss thinks that options are a

Charles has a problem. His boss thinks that options are a form of gambling. The company he works for exports to European markets, which require euro invoicing. The market is cut-throat, and sales are...